Summary
The Renewable Fuels Standard provides a baseload of demand for ethanol and biodiesel. However, the lower oil prices have impacted the economics for discretionary blending and could limit the continued growth in use of these alternative fuels.
Analysis
Over the last year, increases in gasoline prices outpaced that of ethanol and the economics for ethanol blending were prohibitively in favor of doing so. The recent collapse in oil prices has resulted in petroleum product to renewable fuel spreads which are now limiting discretionary blending in several markets.
The Renewable Fuels Standard (RFS)requires the use of 9 billion gallons (BG) in 2008, increasing to 11.1 BG in 2009. Of this 11.1 BG, 500 million must be biodiesel while another 100 million is advanced biofuels. For all intents and purposes, the balance 10.5 BG will be made up of ethanol, either corn based or sugar based. These figures will provide a floor for demand, however, the use of carryover RINS will enable some obligated parties to use somewhat less physical volumes.
On the one hand, the ethanol and biodiesel industry are plagued with too much capacity which ultimately limits the product revenue side. By my count, excluding the two Verasun plants in Janesville and Welcome MN, the ethanol industry has just over 12 BG of annual capacity. This is more than adequate to meet the 2009 RFS. In addition, one must expect some amount of imports either from the CBI or Brazil that would go to Hawaii and also compete with domestic sources into Florida. During the first eight months of 2008, the USA imported approximately 350 million gallons of ethanol per the DOE.
According to the National Biodiesel Board, at least 2.61 BG of biodiesel capacity exists as of September 29, 2008 with another 849.9 million gallons of capacity under construction. This is more than adequate to meet the 2009 RFS for biodiesel. Over 300 million gallons of biodiesel will be exported from the USA this year; actions by the EU could significantly affect this movement in the future.
The petroleum industry will continue to use ethanol to make reformulated gasoline in the major metro areas and to meet state implementation program requirements. Biodiesel will continue to be used where mandated. The question is how do discretionary blend economics currently look as a result of the fall in petroleum prices.
NYMEX gasoline futures prices today are approximately 135 cents per gallon and the cash markets around the country are either side of 5 cents per gallon of this number. Ethanol in Chicago is about 173 while in New York it's 183. The ethanol to gasoline spread in NY is about 48 cents, barely enough to be offset by the 51 cent per gallon blender tax credit which goes down to 45 cents per gallon on January 1, 2009. Ethanol delivered to the Carolinas is another 10 cents higher or 193. Discretionary ethanol blending in the Carolinas has become uneconomic. Several other parts of the country, notably the west coast are seeing a similar deterioration in blend economics.
Soybean oil based biodiesel SME today was quoted at approximately 338 cents per gallon in Houston while palm oil based PME was approximately 250 cents per gallon. With NYMEX Heating oil futures at 200, the SME to HO spread of 138 is too much to overcome for the $1 per gallon blender tax credit for biodiesel. On the other hand, blending PME makes economic sense. Unfortunately in the USA, most of the biodiesel produced is soybean oil based. The economics do not justify blending SME into either heating oil or diesel unless there are additional state and local tax incentives.
As the markets stand now, ethanol and biodiesel use will continue as dictated by federal, state and local mandates. Growth in the discretionary blending market will slow unless economics improve. For the economics to improve, the ethanol and biodiesel industry either need for petroleum product prices to markedly increase or the renewable fuels feedstock costs to dramatically decrease giving the industry a margin. Otherwise, the Renewable Fuels Industry is in for a long 2009.
